Government likely underestimating value of student loans never paid back

The Government consistently over-estimates annual repayments on student loans and consistently under-estimates the debt that will never be repaid. The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"There is around £46 billion of outstanding student loans on the Government’s books, and this is before the full impact of fee rises to £9,000 a year. This figure will rise dramatically to £200 billion by 2042.

The Government assumes that 35% to 40% of the total will never be repaid. That is some £16 billion to £18 billion on the current debt of £46 billion and £70 billion to £80 billion on the estimated value of student loans by 2042.

But we don’t have confidence in those figures. We think that the value of student loans never to be repaid could be even higher – because the Government consistently overestimates what’s due to be repaid by some 8%. The Department must improve its forecasting so that action can be taken to reduce the ever-growing write-off figures.

The Government intends a further sale of the loan book to finance the increase in student numbers it promised, so any sale must represent value for money. But the reality is that the Department lacks a robust model to estimate the value of the loans properly.

The Department must demonstrate that it has a firm grasp upon the real value of the student loan book and the long-term cost to the taxpayer of any early sale. It must satisfy itself that there is a strong level of competition between bidders and what they might pay for the loan book.

We also think that the approach to collecting debts just isn’t tough enough.

The Student Loans Company is in the dark over what a large number of borrowers (368,000 at March 2013) who are not repaying at the moment but are still classified as being in the ‘repayment’ category are currently doing. It knows very little about British graduates who live abroad or about graduates from the EU who have since left the country. Will they ever pay back their loans? The Student Loans Company simply doesn’t know.

The Department and Student Loans Company have not put enough energy into identifying those borrowers who should be making repayments but have slipped out of contact.

Borrowers are still receiving a substandard service. They still have to use premium-rate phone lines to contact the Student Loans Company, online services are inadequate, and the IT is no longer fit for purpose."

Margaret Hodge was speaking as the Committee published its 44th Report of this Session which, on the basis of evidence from the Department for Business, Innovation & Skills (the Department), the Student Loans Company and HM Revenue & Customs (HMRC), examined the valuation and collection of student loan repayments.

The Government introduced student loans in 1990. The Department is responsible for the overall system of collecting repayments, which is operated by the Student Loans Company and HM Revenue & Customs (HMRC). In 2012-13, the Student Loans Company and HMRC spent £27 million operating their systems for collecting £1.4 billion of repayments, the majority of which are collected through HMRC’s tax systems. The student loan book is a substantial public asset, and the Department estimates that the value of outstanding loans will increase from £46 billion in 2013 to £200 billion by 2042 (in 2013 prices). The Department therefore needs to understand which loans are due for repayment and what the outstanding loans are worth, and ensure that it collects all those payments due.

Since student loans were introduced in 1990, there has been no reliable model for forecasting how much will be repaid to the Exchequer. Despite investment to improve the forecasts in recent years, the Department’s model for estimating future loan repayments still consistently over-estimates annual repayments by about 8% compared with the amounts actually collected. As a result, the Department is likely to be underestimating the value of student loans that will never be paid back; currently the estimate is between 35% and 40%. The Department cannot be properly held to account for performance because it does not publish its forecasts and it does not report on variances between forecasts and actual amounts collected. It also does not publish all of the detailed assumptions it is using to calculate the value of the student loan book.

Recommendation: The Department must publish clear and easily-understood annual forecasts of what it expects to collect in the year ahead, and explain any subsequent variances between forecasts and the amounts actually collected. It must also invest in improving its forecasting capability so that action can be taken to reduce the ever-growing write-off figures.

We were reassured by the Permanent Secretary’s statement that any sale of the student loan book “has to represent value for money for the taxpayer”. The Government has announced that the cap on the number of students that universities can admit will be lifted, with the additional costs met through the sale of the student loan book to private investors. We welcome the Department’s commitment to secure value for money from the sale of the loan book, but, at present, the Department does not have a robust model to properly estimate the value of the loans, and so cannot yet give us confidence that it can assess the value for money of a sale or the long-term cost to the taxpayer. If, as the Department intends, the loans continue to be collected through existing tax systems after they are sold, opportunities for a private buyer to make efficiencies will be limited and could restrict competition between bidders. The Department therefore has some way to go before it is in a position to make a convincing value for money case from future sales.

Recommendation: The baseline valuation for the sale needs to be determined in advance. The Department must demonstrate that it has a robust understanding of: the realistic value of the student loan book; the long-term cost to the taxpayer of any early sale; and the expected level of competition between bidders and what they might pay for the loan book.The approach to collecting debt lacks rigour. The Department and the Student Loans Company need to improve the collection of loan repayments. The targets that the Department has set require the Student Loans Company to have up-to-date information on what borrowers are doing and whether they are earning enough to repay. However, the categories used to report the numbers of borrowers repaying lead to confusion. For example, out of 2.88 million borrowers who count towards the Student Loans Company’s annual targets, 438,000 have already repaid their loan in full so should no longer be counted as being in the repayment system. The Student Loans Company lacks information on what 368,000 graduates who are not repaying at the moment but are still classified as being in the ‘repayment’ category are currently doing. It has little information on British graduates who live abroad and EU graduates who have also left the UK. As a result, the Department and the Student Loans Company have not put sufficient energy into identifying those borrowers who have slipped out of contact but should be making repayments. The Department needs a better understanding of performance gaps and how it could address them.

Recommendation: The Department should set, and report against, more stretching and meaningful targets for debt expected to be collected, and for measuring the Student Loans Company’s performance in specific key areas. This will improve transparency and accountability. It should develop a strategy and targets for collecting overdue debt more quickly from all categories including borrowers living overseas.

Opportunities to share data with other public bodies to track down borrowers have not been exploited by the Department and the Student Loans Company. Data sharing between departments should improve ways of tracking down and confirming which borrowers are earning enough to repay their loans and could also help to identify fraud. The Department does not, for example, share information with the Home Office’s e-Borders programme on borrowers with whom they have lost touch and who may enter or leave the UK. While the Department and the Student Loans Company have discussed the possibility of data sharing with the Department for Work and Pensions, the Department of Health and the Home Office, progress to date has been minimal.

Recommendation: The Department and Student Loans Company should work with other government departments to develop a strategy for sharing data to gain more information on borrowers’ whereabouts and earnings and to help identify previously undetected fraud.

The quality of customer service provided to students has improved, but significant difficulties remain. While we note that there have been recent improvements in customer service and borrower satisfaction, borrowers still have to use premium-rate phone lines to contact the Student Loans Company. After our hearing, the Student Loans Company confirmed that it plans to stop using these lines by April 2014, but it has been slow to reach this position. The online services for students and graduates to update their details and provide information are also inadequate and the IT is outdated and no longer fit for purpose. For example, borrowers cannot use online forms to provide information on their current circumstances, and instead have to print, manually complete and post, or scan and email, the forms. The Student Loans Company told us that that new IT and ways of working, due to be introduced in the next financial year, will address these issues.Recommendation: The Student Loans Company must deliver on its promises to improve its online services to borrowers and to stop using premium-rate phone lines in the new financial year.